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Citigroup (NYSE:C) is one of the world's largest diversified financial services firms, which means that it makes money by loaning out money and receiving interest on the loans. Citi had significant exposure to the subprime mortgage industry and suffered considerable losses in 2007 and 2008 front large write-downs and write-offs on many of its mortgage-backed securities and collateralized debt obligations. Citi has posted 5 straight quarterly losses, most recently $10.4B 3Q and $8.29B 4Q losses.[1][2]
In January 2008, Citi announced that it would be splitting into two businesses to focus on its core business. Citicorp acts as a traditional bank with $1.1 trillion in assets, while Citi Holdings manages its riskier assets, which it will try to sell to raise cash. In an effort to avoid considerable future losses due to mortgage-backed securities and collateralized debt obligations, Citicorp will be 65% deposit funded.[3] To reduce operating costs, Citi has sold branches such as CitiStreet, CitiBank, and its banking operations in Germany.[4][5] Citi's efforts to cut costs has stretched up to its CEO, Vikram Pandit, who announced that he would accept only a salary of $1 and no bonus until the firm was returned to solvency[6] These efforts represent a shift away from an investment bank into a standard holding bank.
In June 2009, Citi was removed from the Dow Jones Industrial Average (.DJIA). The move was prompted by a number of issues, including its share price dropping more than 90% over the year and receiving $45B in Troubled Assets Relief Program (TARP) funds, which it used to extend $36.5B in loans - mostly to mortgage backed securities. The $45B bailout has given the government a 35% stake in Citi, which some consider the government's 35% share to be a way of nationalizing the bank. The government has recently declared that it will convert its preferred shares to common shares. This negatively effects Citi's share price because the stock will be diluted. In addition, the government holds the right to convert the remaining $20B shares in the future, which would further dilute Citi's shareprice.
[edit] Business Overview
[edit] Consumer Bank
This division provides traditional commercial banking services. Lending opportunities are also available under this arm of Citi, including loans for housing, auto-financing, and for students. Citi also issues credit cards under the Visa, MasterCard, Diners Club, and American Express networks, with around 120 million cardholders globally. On July 17, 2008, Citi announced that it had received approval from the Chinese government to issue debit cards to its customers in China, giving it access to the booming market there (in 2007, the number of card transactions in China totaled roughly 13.5 billion).[7]
[edit] Corporate & Investment Bank
This unit offers financial advice to companies interested in raising capital or involved in mergers and acquisitions and provides clients with cash management and treasury services, such as streamlining multiple asset classes under one processing system. In addition, its Global Capital Markets division provides sales, trading, and research services, and is the second largest brokerage system in the U.S.
[edit] Wealth Management
This unit provides high-net worth individuals and institutions with trust maintenance and advisory services in over 30 countries. The latter includes governments, private firms, companies, and foundations. It includes Smith Barney, its private wealth management unit that manages more than $1.2 trillion in assets, and Citigroup Investment Research, which covers 90% of the companies featured in major international benchmarks. In addition, this unit encompasses an alternative investment arm, which includes a private equity division and a hedge fund.
Contents |
| Annual income data, in millions | 2005 | 2006 | 2007 | 2008[8] | 1Q2009[9] | |
|---|---|---|---|---|---|---|
| Net Interest Income | $39,240 | $39,488 | $46,936 | $53,692 | $13,068 | |
| Loan Loss Provision | $17,424 | $33,674 | $5,832 | |||
| Non-interest Income | $44,402 | $50,127 | $34,762 | ($899) | ($627) | |
| Net Income | $19,806 | $21,249 | $3,617 | ($27,684) | ($5,111) | |
[edit] Trends & Forces
[edit] Government Bailout and Repercussions
As of February 2009, the government has given Citi $45 billion in Troubled Assets Relief Program (TARP) funds. The government now has a 35% stake in Citi. As part of its agreement with Citi, the government has opted to take on more risk and convert $25 billion of its preferred stock to common shares. The government is bearing more risk by converting its shares because it is subject to the volatility of Citi's stock prices. By converting its shares, Citi will have more tangible equity available to improve its balance sheet. Its equity-to-asset ratio will improve from 1.5% to approximately 4%.[10] The Federal Deposit Insurance Corporation (FDIC) defines a bank as being critically under-capitalized with a ratio under 2%.[10]
This move negatively effects stockholders because the huge conversion to common stock will lead to a dilution of shares, and Citi has agreed to stop paying dividends for at least the next 3 years. In addition, the government has the right to convert its remaining $20 billion in shares to common stock in the future. This would further dilute the stock and give the public even less of a stake in Citi. If the government chooses to convert all $45 billion shares, existing shareholders could have as little as a 25% stake in the bank.[10]
[edit] Interest Rates
Loan defaults, particularly in the subprime market, have increased throughout 2007. As interest rates on adjustable-rate mortgages reset, some borrowers find themselves unable to afford the higher monthly payments. Rising interest rates raise the cost of borrowing for all lenders, dampening the overall demand for mortgages and other home loan products. The U.S. Federal Reserve's rate cuts in 2007 and 2008 could, however, help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates.
Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This attitude has weakened the housing loans business for banks and encouraged them to expand their portfolio into other markets (e.g., Morgan Stanley's recent purchase of hotel properties in Japan).
On October 1, 2007 Citigroup announced that it expected third quarter profits to be down 60% compared to the same period last year, indicating that its exposure to the subprime market is greater than originally anticipated. In its fourth-quarter earnings release, Citi announced an 82% drop in net income for the year, citing weak performance in its fixed-income division and the general contraction in the subprime mortgage and credit markets.
[edit] The Yield Curve
Typically banks charge higher interest rates on loans which qualify as long term debt than they they pay on deposits (short term debt). A flat or inverted yield curve, implies that long-term rates are the same or lower than short-term rates. This drastically reduces the profitability of loans. Citi is particularly vulnerable to interest rates fluctuations as it depends more heavily on wholesale funds than its competitors. This means that its cost of borrowing is higher than that of many rival banks.
[edit] Advisory Services and growth abroad
Both activity in mergers and acquisitions and private equity deals have continued to rise since the tech boom of the 1990s. Aggressive merger activity is present in Latin America, as industry is recovering and the regulatory environment is becoming increasingly amenable. A particular focus is seen in emerging markets including Central America and India, both of which are recording a large inflow of capital investment.
Citi has capitalized on its global reach, especially in emerging markets, by taking on a substantial share of both markets. This strength is expected to be bolstered as the company establishes a foothold both in Japan and in Latin America. Benefits have already been experienced as the company ranked fourth in total global transaction volume completed in 2006. However, as financial conditions worsen, Citi has slowed its expansion in Japan and other foreign markets. In Japan, it sold its Japanese trust banking unit NikkoCiti Trust & Banking Corp. and decided to delay its mergers of Japanese units. Instead, Citi has focused on making its US units more efficient and lean.[11]
[edit] Corporate Developments
Mobile Banking: Banks across the industry have made progress into mobile banking issues. In 2006, the major banks including J P Morgan Chase (JPM), Citigroup, and Commerz Bank launched a campaign to open as many ATMs as possible, Citigroup embraced this by opening 5500 new ATMs (according to its 2006 Annual Report). The idea of convenience is extended to a new level by phone-based mobile banking. Basic services like account management and fund transfers are among the possible options for mobile banking. Most importantly, it represents an outlet for those lacking bank accounts, are undocumented, and poor.
Remittances: With Bank of America (BAC) taking the first move into the remittances market, competitors and start-ups are taking small steps into the industry. At present, this segment represents a significant source of untapped revenue with very little competition.
Technology: In 2006, Citigroup created the first (per their 2006 annual report) "biometric credit card." Launched in Singapore, this lending product verifies customers by fingerprint, rather than using a plastic card, providing increased protection against credit fraud.
[edit] Competitive Landscape
The major players in Citi's league are Bank of America (BAC), Deutsche Bank AG (DB) and J P Morgan Chase (JPM). These firms typically operate on a business model that gradually introduces clients to complex financial services and solutions as the client matures. In this way, these banking firms try to cater to the client's entire life span by offering as many products as possible. For this reason some have identified this strategy as building "banking supermarkets." This mode of thinking has changed recently, as Citigroup increasingly focuses on its most profitable products, continues to cut costs and personnel, and relocates offices to regions that are experiencing robust growth.
| 2009 data | Assets ($B)[12] | Revenue ($B) |
|---|---|---|
| Bank of America (BAC) | $2,300 | $113 |
| J P Morgan Chase (JPM) | $2,000 | $101 |
| Citigroup (C) | $1,800 | $106 |
| Wells Fargo (WFC) | $1,200 | $51.7 |
Sub-prime loans composed 70% of the CitiFinancial lending portfolio which put the company under extreme stress. The high default rates forced Citi to keep the Troubled Assets Relief Program (TARP) funding longer than some of its rivals. While JP Morgan and other investment based firms were able to repay their loans in under a year, Citi was not given permission from the US Treasury to repurchase the loans.
[edit] References
- ↑ Fox59 "Citi to split in two, reports $8.29B 4Q loss" 16 Jan 2009
- ↑ Q2 2008 Financial Supplement
- ↑ Samay Live, "Citi to split itself into Citicorp, Citi Holdings," 01/16/2009
- ↑ Credit Mutuel to Buy Citi's German Operations for EUR4.9 Billion
- ↑ Yahoo Finance "Form 10-Q for Citi Group Inc" 1 Aug 2009
- ↑ Bloomberg "Citigroup’s Vikram Pandit to Take $1 Salary, No Bonus" 11 Feb 2009
- ↑ Citigroup Debit Cards for China - WSJ.com
- ↑ C 10-K 2008 "Selected Financial Data" p.116
- ↑ C 8-K 1Q2009 "Consolidated Statement of Income" p.2
- ↑ 10.0 10.1 10.2 CNN Money,"http://money.cnn.com/2009/02/27/news/companies/citigroup/index.htm," 02/27/09
- ↑ MSN Money: "Citigroup to sell Japanese trust banking unit" 16 Dec 2008
- ↑ Herald Tribune "Bank of America claims top spot in assets" 15 June 2009
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